If you don't have a proven track record in this, you'll need to go down a specialist lender route rather than mainstream banks. Finance is available, but a bit harder to get.
If you look around at small developments, you might see the name of lender advertised.
Coincidentally, I saw a sign promoting one of them (who I wouldn't recommend to anyone !) today while driving through South Dublin.....
Hi,
I'm looking for a ballpark idea of what kind of interest rate a typical bank would charge now-adays to a small property developer.
eg. Buy a single derelict property in Dublin city centre completely renovated it and flip it. With the way the property prices are at the moment it seems like being a property developer would be a license to print money assuming you could get financing to fund it. So two questions
(i) What %age of the overall development cost would a bank typically be willing to lend ?
(ii) What kind of interest rate would they charge ?
eg, buy a wreck for 300k, spend 200k renovating and then flip it for 750k.
Would a bank lend 100% of the cost ie 500k or would they demand that the developer had 250k of their own money. If they did agree to lend, what kind of interest rate would they be charging ? Is it like 5% or 10% or 20% ?
Thanks,
Mike.
Hello Mike,
Odds are none of the mainstream banks would touch this with a barge pole. They all did it back in the 00's and when things went wrong in the subsequent recession, every one of those banks had massive problems - primarily because single property developments were being done by Borrowers with limited resources / limited experience, so could not carry the finance when unable to dispose of the property for profit and also, could not settle the shortfall when the properties were sold at a loss. Also, many were small size transactions, which had been funded by Bank staff who did not have sufficient property development funding experience, so now all property development funding is done exclusively by specialist bank staff under strict sector guidelines.
Banks are happy to fund select development projects with decent equity, in good locations, which are large enough to be attractive for them in terms of potential profit, are held within a company where a Receiver can be appointed overnight if there's a problem etc. They want to see evidence of successful experience with similar developments, detailed architects plans, cashflow projections, have a QS sign off on stage payments, valuations from panel agents, highly regarded property agent's projections on likely sale price of properties post development etc. Funding might include: up to 75% of site cost, plus (in theory) full development costs, for city and near city desirable locations. Additional security, and / or a level of personal recourse will also typically be a factor for smaller projects, not just security over the development project. Lending rates will vary from deal to deal, but for something like a €2m deal, you might see an interest rate of 8% plus success fees (basically a fee payable on the sale of each house / apartment). However, those developments are a long way off what you are talking about here.
Non-Bank lenders such as Castlehaven and Lotus for example, want to deal with experienced developers, who have a proven track record (but may not be able to get funding from the traditional banks, possibly due to a historic credit issue caused by the recession etc.). They are looking for projects which are circa €1m upwards, and in preferred city / near city locations. The figures you are talking about are below those size limits. In theory, they will do smaller deals, but in reality they don't really like them, so will want to see notable equity in them (i.e. 30%, sometimes more). That said, they are often provided on a non-recourse, or limited recourse basis. Costs are high, particularly when you consider the various fees in addition to the lending rates. You could expect to see them looking for 14%-18% for a 12-month deal, where they've provided something like 70% - 75% site value and possibly a bit more in development funding. Those indicative costs are a blend of lending rate, up front arrangement fees, exit / success fees etc.
The indicative costs that I am referring to do not include such additional outlays as: Valuation fees, Architect Fees, (likely) Quantity Surveyor fees, Legal fees which will all cost extra and typically be at your expense (especially when dealing with a non-bank lender).
I've seen the odd, single property development deal pop up on the peer to peer websites, looking for funding. While they might be a tad closer to the type of deal you are talking about, they don't come cheap and you will be personally liable by way of a personal guarantee for the full debt, in addition to any other security which may / may not be taken. Many investors that put money into deals on peer to peer websites don't like them given the risk and absence of sufficient development funding experience etc, so they don't often get full funding.
The reality is that on the type of single house deal that you are proposing (buy €300k, spend €200k, flip for €750k), there is high risk for any lender. It's riddled with hope value, and high risk, with no real cushion to protect them if things go wrong.
If you are serious about trying to put a deal like this together then I'd recommend that you raise the funding privately through investors, and all take a percentage shareholding in a newly established limited company (which will carry out all transacations). If at all possible, get the likes of an architect, accountant, solicitor invested into the deal (along with a good builder), as they bring valuable experience and skills to the table. Establish a track record on a number of deals, then see if you can finance a deal with a lender on reasonable terms. I would advise against the non-bank lenders for what you are thinking about, at all costs.
While we are back at a time where property values have gone crazy and it looks like it's easy to make lots of money quickly in property, thread very carefully as a lot of small investors / developers got themselves into very serious financial trouble when things went wrong last time around !
